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Small Business=Fraud, Countercyclical Planning, MMT, and Other Economics Catch-up

Note:This was going to be short pieces about things I missed during a week of illness. It turned into a Very Long Piece riffing on two posts from Capital Gains and Games. And that’s without even mentioning the bravura work Stan Collender is doing there: see, for instance, this note that a deficit reduction bill with tax increases is very possible if you just ignore John Boehner.

  1. Small Businesses exist in the United States solely as a vehicle for people to commit tax fraud more easily.

    I don’t see any other realistic conclusion from this piece by Pete Davis. He tries to hide it, putting an idiotic suggestion with an Order of Magnitude’s less value fist, and mostly got people in comments to talk about COLAs, because economists are stupid that way. But the big number—$2,900,000,000,000—remains the big number.

    The only proper conclusion from the entries after the first two would be that Pete Davis can’t do mathis very fond of negative-NPV solutions. You could conclude from this that Pete is really stupid, but we know better. Besides, Len Berman of Forbes already went there, concluding, “Pete, you know better, and you’re just enabling them.” The integrity of posters at CG&G doesn’t usually get questioned so directly in the mainstream.

  2. And there’s good reason for that. Andrew Samwick has argued for years that stealing from the Greenspan Commission’s “making Social Security solvent for future generations” fund, and I expect him to continue to do so, just as I will continue to argue that everything in the Greenspan Commission documents says that was not the idea. But Andrew has me worried—possibly in a good way—about his idea of how to combine economics and family:

    Actually, the government should budget the way families should. It’s just not clear that families actually do what they should. Both families and the government should budget countercyclically — their savings rates should be higher during periods of growth than during periods of economic decline, so that their consumption can remain steady across booms and busts. The problem that both the government and families are having today is that neither one saved enough during the most recent boom, and so both are having to cut back more than would be ideal during this protracted downturn.

    Now Andrew—who is younger and cuter than I—is starting to sound like the old man telling us to get off his lawn. Either that or he has just discovered that Lifecycle Theory of Economics doesn’t work so smoothly in reality as in the standard models. Or both. So it’s probably safest if I use that paragraph as a springboard to talk about Countercyclical Policy, Rational Expectations, and MMT (below the fold).

The glory of Accounting Identities is that they must be true; the truth of them, though, is that there are many ways to get there. (“What do you want it to be?” is not just a joke; see Point One above.) So let’s start from an Accounting Identity:

Y = C + I + G + NX

Now, Andrew might have argued—and I might have agree conceptually—that transfer payments such as Unemployment Insurance, Social Security, Disability Insurance payments, and Medicare/caid Prescription Drug Coverage should be counted as C, not G. But since Andrew insists that Social Security benefits can be cut without Social Security payments being reduced, he’s clearly treating those payments as part of G, not C.* So I will too.

Now, MMT people—as I think of them, the ones who make certain that only Kevin McHale can “spike” the punchbowl**—argue for Nominal GDP targeting. This would keep the overall risk-free rate (r) relatively stable*** since the components of r combined— π + ie —pretty much has to equal “5” at all times.

Given that, the expectation should that the nominal Yt+1 should equal about 1.05Yt on an annual basis.

Several of you are looking up and saying, “Nu?” So let’s go back, then, to Andrew’s “all should budget countercyclically” claim and see what happens in a stable-NGDP, possibly-MMT, world.****

Let’s make one more assumption (not necessary, just easier for maths): at stable equilibrium,***** π and ie are both equal to 2.5: that is, 2.5% growth, 2.5% inflation. So, all else equal, half of the return on savings is going to be taken by inflation and half of the cost of debt is inflation. In an environment with no tax distortions and in which all lending is done sensibly and prudently (I’d like a pony, too), this is pure realisation of Modigliani-Miller: businesses should be indifferent between raising capital and borrowing, either of which is an Investment (I).

So assume that the growth rate for the economy—as a reminder, that’s the π portion—is expected to be three percent this year (it’s a good year). MMT would tell us that, to stay stable, we have to reduce inflation expectations to 2%. This means draining money from the system to reduce Isl (supply of loans) in the financial system.

(As noted above, at equilibrium, there is just enough loan money to go around. Since this is above equilibrium, profits will be reduced and businesses will have to raise I through capital, not loans.

Andrew would tell us that people in good times want to save more. This means that C should go down, relatively, which means that Isc (supply of capital) goes up.

Since—again, an identity—Is = Isc + Isl, MMT demands that personal savings rise to cover the tighter monetary policy. Just as Andrew wants. And just as is more possible in growth times than tight times.*******

So, ideally, I remains constant, if dIs = dIc. Not my favorite assumption, but a working one.

So far, in the boon environment, C is down and I is, at best, neutral. What about G?

Well, in Andrew-world, government is “saving for a rainy day.” Which means on balance that it’s trying to make more and spend less, just like the family. Which means there are two forces at work—(1) monetary policy, as the interest rate is tightened to control demand and/or reduce inflation, and either (2a) tax rates or (2b) spending cuts in some manner—that are working in the market.

I doubt 2a (tax increases) is the desired method of slowing growth (if you’re MMT-inclined) or stabilizing to equilibrium (which I assume to be Andrew’s goal). So let’s assume spending cuts.

Here those transfer payments come in. As the economy grows, UI costs are reduced. Let’s assume similar, smaller gains in other areas and stipulate that G declines in an above-equilibrium state due to a reduced need for spending—not “spending cuts” per se, but rather people being employed as growth comes.********* Best case scenario, fewer UI payments are made, debt is repurchased with those funds, future liabilities is reduced, and more revenue comes in as business expands—which is used to pay down debt so borrowing can be done more easily (read: at a relatively lower rate) during a downturn.

G declines. As Andrew would want, for good and proper reasons.

Which leaves NX. An expectation of 3% real growth is higher than the market had expected. Currency appreciates; exports become more expensive to buyers, who buy fewer. Imports become less expensive, relatively. dNX is negative (dX=0).

So with moderately higher growth, C, G, and NX all decline, while I either (a) increases slightly (in the absence of the need for and use of monetary policy, and not greater than C declines) or (b) declines (if monetary policy is used to reduce loan demand, since that pesky C0 rather ensures that dIsc |).

If you don’t use monetary policy to drain funds from the system, in which case (C + I) remains relatively stable or rises slightly, NX is more ambiguous (effectively=0), and G still realizes those spending cuts (paying down debt—more tax revenues at the same rate as business expands—which cet. par. increases the spread between r and equity investment and means some of that Is becomes Ic, but that’s a side discussion).

The implications here, and for a downturn example and the full cycle model, are left to the next post.

*This should make it clear that this point was not opened with an ad hominem attack, so anyone who suggests so in comments—even on the basis of “well, I didn’t read below the fold”—will see that comment deleted. Assuming, of course, that I read the comments on a regular basis, so you’re probably safe, if warned.

**Glee, not old NBA, reference.

***Still some uncertainty and timing issues, but a relatively flat but upward sloping yield curve would be a perpetual result.

***The coolest thing about working with everything in Nominal terms is that we can basically eschew calculus and natural logs. The worst thing about working with everything in Nominal terms is…

*****You’re driving down a dessert highway in a two-seater. By the side of the road, miles from the nearest water source, you see A Gorgeous Blond(e), Santa Claus, and an old, tired-looking Stable Equilibrium. Which one do you offer a ride?

A: The Gorgeous Blond(e). The other two are figments of your imagination.******

******Yes, think joke works better with “a brilliant violist.” But this is an economics blog, so live with it.

*******I would quibble Andrew’s statement that people borrowed too much for two reasons: one is that market transactions where the borrower is the one most subject to getting a poorer deal due to issues of asymmetric information hardly call to mind the borrower’s irrationality. Second is that many of those transactions were people “trading up” without clearly taking on a greater burden. (That is, $200K in equity on a NYC 1BR became a $200K down payment toward a home whose costs would be similar or lower, cet. par. The household balance sheet was not necessarily expanded on purchases. (That those purchases were at a higher direct cost than the available OERs is a separate, significant issue.) Similarly, HELOC borrowings that were invested into the property—all those effing marble kitchens for people who don’t know how to cook—are only negative to the balance sheet to the extent that they don’t have a reasonable ROI in the first place. That is, the deadweight loss is probably 30% or less on any portions of HELOCs that were used for Home Improvement projects.

Collaterally, if the HELOC was used in place of savings or 401(k) borrowings or other assets (for those who have same)—or even a higher-interest rate “bank” loan—as the method of buying a new car or other necessity, the fault lies not with the borrower, who made the rational (ex ante) choice to stay invested in “the market” and/or maintain Investments (savings).

In short, since all mortgages and HELOCs have been getting tarred with the same brush, we cannot be certain the extent to which “bad borrowing” was actually bad borrowing, or whether it was just borrowing based on the expectation that jobs and income would remain fairly stable—not drop the f*ck off the cliff and be reduced in even nominal terms for the survivors—concurrent with “investment” values dropping into an abyss.

Anyway, since C0 is still essentially constant (“sticky”) even as income first declines, it is intuitive that saving is easier (consider the effect on S = Income – [C0 + Cchoice] as Income approaches C0) in more prosperous times, on balance, for most of society, distributional effects being constant (or changing incrementally).

*********In such an environment, monetary policy may not be used so proactively. This should be fine for all, given that 5% NGDP is the target, not the absolute. Over time, it will smooth. I guess.

Beating The New Republic by Seven Days, or Does Jonathan Cohn Read AB?

Yes, it’s another “AB was right” post. Detractors of this blog in general and me in particular could stop reading now.

But they shouldn’t. Anyone who thought through the economics could have pointed out what I did on the 17th:

From [Republican Congressman John] Boehner’s site:

At least 30 percent of employers would gain economically from dropping coverage even if they completely compensated employees for the change through other benefit offerings or higher salaries.

This should be intuitive. If the company is paying $1,000 a month for my family’s health care along with my $800 a month, it can raise my paycheck by $1,000 a month—employee compensation is employee compensation—and cut back on its health care administration. If I’m not a health-care administrator, it’s win-win.

Any economist worth her salt should know that lower costs of employment increase overall employment (assuming there is not a demand-side problem).

If the McKinsey “study” were accurate—again, not the way to bet—we should expect overall employment to increase….

The follow-on effects in that universe: more people joining the HIEs than expected, improvements in the measurement of “real” wage growth, greater transparency in the current health-insurance system, and arguably a larger contingency of workers demanding something closer to a single-payer solution, all improve efficiency and provide opportunity for economic expansion.

Or what Jonathan Cohn wrote for the Kaiser Health Network and The New Republic a week later:

But here’s the irony: Most people like the insurance they get from their employers, which is why you hear politicians from both parties constantly promising to keep that coverage in place. In the long run, though, workplace-based insurance is probably not an arrangement worth preserving….

An ideal health care system would…liberate employers from the responsibility of administering health benefits for workers, allowing them to concentrate on other, more productive activities. Let the car companies make cars and the grocery stores sell groceries and the software firms design software. They don’t need to be running health insurance plans, too.

I’ve left out Cohn’s historically-illiterate paragraph about the groups of private health insurance, since he omits the main reason it developed: wage controls during wartime left employers looking for other ways to attract and keep workers.* At least he comes to the correct conclusion:

A single-payer system, with a combination of basic government insurance and private supplemental coverage, would be a much better alternative. So would a “competition” system that looks like what is currently in place in the Netherlands or Switzerland, or what Senator Ron Wyden, D-Ore., first proposed back in 2007. The Affordable Care Act could evolve into such a system, particularly if the new insurance exchanges work well and workers feel comfortable the insurance available there is as good as what they’d get from employers. But that transition would probably take a lot of time, no matter what corporate officials were telling the survey-takers at McKinsey.

It’s not just a lot of time. It’s a lot of opportunity cost and underutilized human capital. And we have enough of that already,** no?

Good to see the Mainstream catching up with AB.

*As an alternative history, consider that, if that industry hadn’t begun to develop during the War After the War to End All Wars, the U.S. might have followed the same path as the United Kingdom and founded the National Health Service, instead of leaving the country, almost sixty-five years later, trying to pretend that Barack Obama is Tommy Douglas.

**Yes, I would have found a way to link to this piece just for the title. When Brad DeLong is starting to entitle his pieces as if he were Lee Papa (or at least me; see the following link), the Sensible Centrists are once again signaling that their imminent move into the Activist camp.

Time to Change Those Tags? or Economists Catching Up, Round Two

Brad DeLong, not generally a Leading Indicator in such matters, follows Mark Thoma yesterday in looking into the abyss and seeing the outline of a train around the “light”:

Henceforth, I will call the current unpleasantness not “The Great Recession,” but rather “The Little Depression.”

This still strikes me as optimism, but I’m stil on what do you call 1873-1896 (much more similar to the current situation) when “The Great Depression” only lasted about 17 years?

(Aside: Round One of Economists Catching Up was here.)

"Top X" economics blogs

by Mike Kimel

I recently got an e-mail from a fellow blogger asking me to link a list that blogger made of “top X” economics blogs. (And no, I will not link to the list or identify that blogger.) My response:

Hi. Umm…. I looked over your list, and while there are some very good blogs on it, there are also some that frankly, from what I can tell, specialize in peddling misinformation. By that I do not mean blogs that have a perspective with which I disagree. I tend not to agree, for example, with the folks at Marginal Revolution on many things, but they produce an excellent blog with well thought out posts and which generally get the facts right. I myself have listed them as a daily read at Angry Bear and would recommend them to anyone.

On the other hand, your list contains four blogs that from what I can tell are more likely to state or link to “facts” that are not true. There are also several blogs I do not recognize on the list so it is possible that there are more misinformation peddlers than that on the list. I am very sorry, but I cannot recommend your list to anybody.



How should one deal with those that peddle misinformation? Your thoughts?

Economics Cannot Find Racism; Just Move Along

One of my favorite paper presentations ever was by Daniel Parent, who is a good enough reason in himself for pending Labor Economists to apply to HEC. He was trying to present data on income inequalities in the Financial Services industry and was forced to note—all right, I asked—that they didn’t have the data to determine if there was a racial difference in earnings because there wasn’t enough data on high-earning Blacks in the sample to be “statistically significant.” Since the sample used IRS data, among other sources, the answer was clear.

Now (via Tyler Cowen), I see that “not statistically significant” is not just for Financial Services Executives; the WSJ’s markets blog notes:

On average, Republican professors gave black students grades that were .2 of a grade point lower than their Democratic colleagues, or about two-thirds of the distance between a B and a B-minus.

(Among eleven black professors in the sample, there were no Republicans, and the Democrats appeared to grade white and black students as their white-Democratic peers did. But there were too few black professors to make that finding statistically significant.)

Again, the finding may not be statistically significant, but the sample, er, complection is.

Their data set is available here.

UPDATE: Thoreau riffs on the subject and finds a link to the paper.

Thought-Experiment of the Day

It’s no secret I’m not a fan of the birth-death adjustment to the employment serieses: not from a necessary belief that they’re biased, but rather because they give the lie to the illusion of accurate monthly data.

But imagine for the moment that there had been no adjustment before the January data release.  The headline number for January might well have been north of 400,000, making the past three months even more impressive (from a headline perspective only, but still…) in terms of job creation.

Would that change anyone’s opinion of the timing and/or need for tightening?  (See also my post earlier today with the graphic borrowed from The Big Picture marking a growth comparison with 2003-2004.)

Kauffman Economics Bloggers Forum Update and a Few Links of Noe

I’m in Kansas City, where the Royals have started the season as one would expect of the current iteration of the team.

Fortunately, I’m not here for the baseball, but rather for the Kauffman Economics Bloggers Forum. There will be presentations tomorrow (agenda here; homepage for live streaming here) in three session. The morning features Tyler Cowen, Ben Wildavsky, Megan McArdle, Bryan Caplan, and Bob Cringely; early afternoon are Lynne Kiesling, Ryan Avent, Arnold Kling, and Felix Salmon; and it closes out with Dean Baker, Steve Waldman, and Virginia Postrel.

All times on the website are Central.

Discoveries so far:

  1. Steve Waldman and Matt Yglesias have the same hairstyle
  2. Felix Salmon agrees with me about individual investors and 401(k)s—indeed, I should say I agree with him, since he’s more vehement about the issue. (He gave me permission to quote him, but this is a family blog.)
  3. For the second year in a row, the “best” barbecue place in Kansas City provided inferior product; Tyler Cowen blames the voters for its loss.
  4. There was much discussion of cricket without mention of Lagaan (which, as I noted last year at this blog, explained to me why the British Empire failed, rather in the same way that Dick is the only movie to make sense of the White House in the early and mid-1970s).

Tune in tomorrow, after the positive but not thrilling Non-Farm Payoll release. Meanwhile:

  1. Buce continues the discussion started by Tim Geithner’s Chief Internet Apologist‘s discussion of Neil Barofsky’s analysis of TARP.
  2. As another two-fer, I’m trying to figure out how Don Marron’s discussion of a letter he signed dovetails with Bruce Bartlett’s analysis of a newly-proposed Constitutional Amendment. Maybe our readers can help?

On a personal note, the only “Asian” food service available at O’Hare Airport was nearly a full kilometer round-trip away from my gate, and I decided that my legs were tired enough. But on the flight from Chicago to Kansas City, I finished reading Sarah Manguso’s marvelous (and short) The Two Kinds [sic] of Decay and thought about feeling ashamed for not taking the walk. Fortunately, the feeling passed, but my regard for and recommendation of the book hasn’t.

Is Economics a science-three comments

by Mike Kimel

Is Economics a Science – Three Comments

In the last few days I came across three very different posts, each of which covers (to some extent) the question of whether economics is a science. In order of how focused on the posts are on that particular question….

Barry Ritholtz is on fire with this post on Alan Greenspan.

Mike the Mad Biologist on when economists misunderstand biology. (My answer to whether economics is a science appears in comments to Mike’s post.)

Brad DeLong provides an insider’s view of the problem.

Update: Discussion hits a chord with bloggers and readers. Here are other links to the discussion.

Noah Opinion blog

Barry Eichengreen

Peter Dorman at Econospeak

Links section at Naked Capitalism in comments.

A Tense Problem

Mark Thoma begins with a hilarious typo, but eventually gets to the Quote of the Decade (if not century) from Alan Blinder:

If we economists stubbornly insist on chanting ‘free trade is good for you’ to people who know that it is not, we will quickly become irrelevant to the public debate.

As Rusty can (and will, at length) tell you, the thing that is wrong with that sentence is the tense. We have had free trade agreements for decades, China has had MFN status since the 1990s, and permanently since 2000. The pieces of the former Soviet Union, including the current oligarchy that is called Russia, have had that status since 1992. NAFTA, including its abhorrent Chapter 11, has been in force since 1994.

There has been a generation that has lived under “free trade.” While an economist might successfully argue that the overall social benefit has been great—millions of Chinese parents become estranged from their children to make a better life, as it were—the retraining, redevelopment and all of the other assumptions economists make about ameliorating the transition to a new economy have been eschewed.

The example of Boeing (h/t Felix) bodes large: the valuable work was outsourced, the menial work was kept (or spun off into bankruptcy), and the new “higher-value” jobs and opportunities that were expected by idiots economists never materialized, replaced instead by growing income inequality and the retraining money lined the pockets of the CEOs who produced (to borrow a phrase used by the brilliant McGarrysGhost on Twitter) “failure masquerading as vision.”

And any microeconomist worth his paycheck can tell you that increasing inequality leads to suboptimal production.

Blinder is wrong in only one thing: the tense he uses indicates that the results are still, somehow, in doubt. The ability of Chinese peasants to eat a bit more is nice, but the externalities—poisoned toothpaste, dog food,* defective tires—make it rather impossible to claim that the “advantages of free trade” have trickled down in any way except as a ureotelic (mp3 link).**

The first thing we were told by our veterinarian about the new puppy is that we need to make certain that any food she eats was made in either Canada or the United States. Fortunately, pet food—unlike its human equivalent—is required to be labeled with origin information.

**You better believe I’m doing The Snoopy Dance on having discovered this site, which saves me from trying to find a way to transfer my old cassette to a usable format. But that’s fodder for Skippy, not here.